1. Chapter 1 The nature of a contract Overview

2. 1. Definition of contract
A valid contract is an agreement, formed by the mutual consent of the two parties.
A contract may be definfed as an agreement, which legally binds the parties. The underline theory is that a contract is the outcome of consenting minds. However,parties are judged by what they have said, written or done, rather than by what they are actually think.
An agreement which the law will recognize and enforce which , apart from other important applications, forms the basis of most business relationships and transactions.

3. 2. Factors affecting the modern contract
The law seeks to protect the idea of ‘freedom of contract’, although contractual terms may be regulated by statute, particularly where the parties are of unequal bargaining strength.
2.1. Bargaining power
It is almost invariably the case that the two parties to a contract bring with them differing levels of bargaining power. Many contracts are made between experts and ordinary consumers. The law will intervene only where the former takes unfair advantage of his position and not simply because one party was in an inferior bargaining position.

4. Freedom of contract is a term sometimes used and can be defined as follows:
'The principle that parties are completely unrestricted in deciding whether or not to enter into an agreement and, if they do so, upon the terms governing that relationship. In practice, this is not always the case because one may be in a much stronger economic position, and legislation has been introduced in order to redress the balance.'

5. 2.2 The standard form contract
Mass production and nationalization have led to the standard form contract.
The standard form contract is a document prepared by many large organizations setting out the terms which they contract with their customers.
The individual must usually take it or leave it.
For example, a customer has to accept his supply of electricity on the electricity board's terms - he is not likely to succeed in negotiating special terms, unless he represents a large consumer such as a factory.

6. 2.3 consumer protection
In the second half of the twentieth century, there has been a surge of interest in consumer matters.
The development of a mass market for often complex goods has meant that the consumer can no longer rely on his own judgment when buying sophisticated goods or services.
Consumer interests are now severed by two main areas.
(a) Consumer protection agencies, which include government departments (the Office of Fair Trading) and independent bodies (the Consumers' Association).

7. (b) Legislation
[55]Public policy sometimes requires that the freedom of contract should be modified.
For example, the Consumer Credit Act 1974 and the Unfair Contract Terms Act 1977 both regulate the extent to which contracts can contain certain terms.
Contract law questions will commonly take the form of scenarios and will require you to advise one of the parties of the legal position, such as asking whether or not a contract has been formed.

8. 2.4 The electronic contract
English law has been concerned with formulating the rules for oral and written contracts for centuries, and cases decided in the 1800s continue to be valid today.
As you will see in the next chapter, there are a number of important rules which depend on the timing of the sending and receipt of letters by post.
With the advent of first the telex machine and then the fax machine, the law has had to be applied to new situations.
Now the development of the internet for commercial purposes has brought new challenges as new ways of doing business come into being.

9. 3 The essentials of a contract
The three essential elements of a contract. Are offer and acceptance, consideration and intention to enter inter into legal relations.
The courts will usually look for evidence of three essential elements in any contract.
 There must be an agreement usually made by offer and acceptance.
 The parties must have an intention to create legal relations between themselves.
 There must be a bargain by which the obligations assumed by one party are supported by consideration (value) given by the other.

10. 3.1 Validity factors
Even if these essential elements can be shown, a contract may not necessarily be valid or may only be partially valid.
The validity of a contract may also be affected by any of the following factors.
 Capacity. Some persons have only restricted capacity to enter into contracts.
 Form. Some contracts must be made in a particular form.
 Content. In general the parties may enter into a contract on whatever terms they choose.
Some terms which the parties do not express may be implied, and some terms which the parties do express are override by statutory rules.

11. Genuine consent. A mistake or misrepresentation made by one party may affect the validity of a contract. Parties may be induced to enter into a contract by undue influence or duress.
 Legality. The courts will not enforce a contract which is deemed to be illegal or contrary to public policy.

12. [56 ]A void contract which does not satisfy the relevant tests may be either void, voidable or unenforceable.
A void contract is not a contract at all. The parties are not bound by it and if they transfer property under it they can sometimes recover their goods even from a third party.
A voidable contract is a contract which one party may set aside. Property transferred before avoidance usually irrecoverable from a third party.

13. An unenforceable contract is a valid contract and property transferred under it cannot be recovered even from the other party to the contract. But if either party refuses to perform or to complete his part of the performance of the contract, the other party cannot compel him to do so. A contract is usually unenforceable when the required evidence of its terms, for example, written evidence of a contract relating to land, is not available.

14. 4 Contractual capacity
English law states that a party is only bound by a contract into which he entered if he had the capacity to contract.
Companies and other artificial legal persons, such as local authorities, do not have the same unlimited capacity as a healthy human being.
Often they are limited in what they can do by their constitutions, which only give them certain powers.

15. Actions done outside those powers are said to be ultra vires - literally,'beyond the powers'. Ultra vires contracts are void, so neither party can enforce their terms.
The ultra vires rule as it applies to companies is now of very limited effect following the Companies Act1989, which amended relevant sections of the Companies Act 1985.

16. (a) Companies can adopt a general clause in their constitutions which enable them to act as a 'general commercial company', so they are not restricted to certain types of activity.
(b) The validity of an act done by a company cannot be questioned on the ground that the company lacked capacity; in addition, the power of the company's directors to bind it are deemed to be free of limitation, provided that the third party dealing with the company acted in good faith.

17. 4.2 Mental incapacity
If a person who is temporarily insane, under the influence of drugs, or drunk, enters into a contract it is binding, with exceptions.
 If he is at the time incapable of understanding the nature of the contract.
If the other party knows or ought to know of his disability
When goods are supplied to a person under such disability, he must pay a reasonable price for them in any event (S 3 Sale of Goods Act 1979).

18. 4.3 Minors
Many agreements entered into by a minor are unenforceable against him by the other parties, although he may choose to ratify them within a reasonable time of reaching the age of 18.
A minor is bound by certain types of agreement unless he chooses to avoid them.
These include a contract concerning land, a purchase of shares and a partnership agreement.
A minor is bound by a contact for necessary goods (eg to purchase equipment needed for school) and services, eg dentistry.

19. 5 Form of a contract
As a general rule, a contract may be made in any form. It may be written, or oral, or inferred from the conduct of the parties. For example, a customer in a self-service shop may take his selected goods to the cash desk, pay for them and walk out without saying a word.
Writing is not usually necessary except in the following circumstances:
 Some contracts must be by deed.
 Some contracts must be in writing.
Some contracts must be evidenced in writing.

20. 5.1 Contracts by deed
A contract by deed must be in writing and it must be signed.
Delivery must take place. Delivery is conduct indicating that the person executing the deed intends to be bound by it.

21. These contracts must be by deed:
 Leases for three years or more
 A conveyance or transfer of a legal estate in land (including a mortgage)
 A promise not supported by consideration (such as a covenant for example a promise to pay a regular sum to a charity)
A contract by deed is sometimes referred to as a specialty contract. Any other type of contract may be referred to as a simple contract.

22. 5.3 Contracts which must be evidenced in writing
[58] Contracts which must be in writing
5.3 Contracts which must be evidenced in writing
Some types of contract are required to be in the form of a written document, usually signed by at least one of the parties.
These contracts must be in writing:
 A transfer of shares in a limited company
The sale or disposition of an interest in land
 Bills of exchange and cheques
 Consumer credit contracts

23. A contract for the sale or disposition of land promises to transfer title at a future date and must be in writing.
The conveyance or transfer must be by deed and will therefore also be in writing.
In the case of consumer credit transactions, the effect of failure to make the agreement in the prescribed form is to make the agreement unenforceable against the debtor unless the creditor obtains a court order
Certain contracts may be made orally, but are not enforceable in a court of law unless there is written vidence of their terms.
The most important contract of this type is the contract of guarantee.